Improving Financial Security During the Current Pandemic
The COVID-19 pandemic has had a devastating economic effect worldwide on both personal health and finances. It is during these times of crisis that elevated uncertainty and volatility can cause significant stress when considering the long-term effects an event like this could have on your economic well-being.
While there remains significant ambiguity in the coming months, we at WESCAP believe that our base case expectations (detailed in our April 28 blog post here) remain the most likely outcome. Nevertheless, re-evaluating your financial plan now can help ensure a firm foundation for your financial sufficiency for years to come.
When reviewing your financial plan, consider the following:
Employment and Income Assumptions
The pandemic has led to a sharp contraction in business activity, resulting in significant layoffs, furloughs, reduced hours, wage cuts and early retirement. If your current or expected income has been affected, it is important to adjust for these changed expectations. Is your financial security reasonably well-protected if you experience any shocks to your employment situation?
Emergency Fund
It is always recommended to have an emergency fund to protect yourself in the event of unforeseen economic disasters, significant medical costs, job loss or injury, etc. Typically, anywhere between 3-6 months of normal expenses plus any known large upcoming expenses (taxes, remodeling, etc) should be held in cash or short-term liquid instruments like a money market fund.
Additional Sources of Liquidity
In the event that you exhaust an emergency fund and need short-term liquidity, it is always prudent to review additional sources of liquidity so that you are not forced into selling securities at the wrong time. These sources of liquidity should equal several years worth of normal portfolio withdrawals so that you are not forced to liquidate assets before they have a chance to recover. Sources of liquidity may include:
Borrowing on Margin – Many taxable investment accounts allow the owner to borrow on margin against the value of their account. In the past, WESCAP has negotiated favorable margin interest rates in order to provide a low cost option to borrow funds if necessary or prudent.
Home Equity Line of Credit (HELOC) – Similarly, HELOCs allow individuals to borrow against the equity in their house at a relatively low cost to the owner. WESCAP typically recommends opening a HELOC as another source of emergency liquidity. This provides an additional safety net and does not cost anything unless it is utilized.
Portfolio Cash and Fixed Income – As part of a well-diversified portfolio, WESCAP always recommends having some cash and fixed income investments – even for more aggressive allocations – in order to provide some downside protection and liquidity if needed.
Review Risk Tolerance
Reviewing your risk tolerance and asset allocation during these times is crucial. By looking at how your portfolio performed during a significant downturn or correction and how you reacted, you can determine if you feel that you were taking too much or too little risk in your portfolio. By accurately reflecting your tolerance for risk, we can ensure that any losses your portfolio incurs do not result in selling equities at the wrong time, thus impairing your long-term investment performance.
Review Financial Projections
WESCAP offers a complimentary detailed financial projection to all of our clients. This projection will take into account personalized assumptions based on your assets, income, liabilities, personal expenses, returns and inflation, providing you with an illustration of potential financial outcomes. This illustration is used to help show burgeoning effects of market volatility and possible effects on your financial future. Even if you have done one in the past, now is a great time to review and update your long-term financial projections.
These are just some considerations to take into account when reviewing your financial plan. By doing so during this difficult time, you may be able to alleviate some stress and mitigate the impact on your future financial goals.
For any questions or concerns regarding your financial plan, or to review your financial projections, please contact your WESCAP advisor.
Kind regards,
Your WESCAP Team